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Europe: +44 (0) 207 198 1634 Good morning. I told you yesterday it was going to be an ugly day for stocks so you were warned. The Dow lost 71 points yesterday closing at 16,915, the S&P 500 fell 8 to 1,965 and the Nasdaq ended down 23 at 4,396. U.S. equities have closed lower 3 or the last 4 sessions. Ok, now for the good news for I am a “glass is half full” type person. Yesterday could have been a heck of a lot worse. At one point in the day the Dow was trading down a painful 180 points. The impetus for the selloff were investors’ worries about the financial stability of Espirito Santo, a Portuguese holding firm that is the largest shareholder of Portugal’s largest bank. It was reported the firm missed a debt payment this week citing the infamous reason, “accounting irregularities.” The bank’s troubles brought back fear among traders and investors about another European debt crisis.
My take on this whole thing is this was an excuse to sell. As I’ve been mentioning for a while now, the bull market has been long and good and stocks are overbought with P/E’s at levels requiring no errors and on any bad news equities are going to fall. The news here in the U.S. was actually positive yesterday with the Labor Department reporting weekly jobless claims were marginally better than economists were forecasting. After spiking back in 2009 jobless claims are pretty close to historical lows dating back to the late 1970’s so there’s not much room for improvement here which also means, in conjunction with last week’s June jobs report, the labor market is approaching prerecession levels.
You read the headlines and you’d think the sky was falling. Folks, the S&P is only 1% of its peak! The U.S. economy is currently in the best shape it’s been in since the recession. The Fed’s QE’s over the past few years have pushed up asset values (that’s Fed speak for equities. The S&P was up 30% last year!) and are all but over (ending in October) and the equity boat is listing heavily to the “long” side and a correction is needed. It’s normal in markets and will be healthy for long term investors. This morning is beginning quietly with Dow futures up 18 with European equities trading positive after getting bludgeoned yesterday. So with the Espirito Santo news behind us it’s time to once again focus on earnings season which began last Monday with Alcoa reporting and is set to heat up next week.
In its weekly natural gas storage report the EIA reported 93 Bcf was injected into storage last week which was greater than market expectations of 86. The bearish number weighed on natural gas prices with the August contract settling an even 5¢ lower at $4.120. Yesterday’s low of $4.114 was a six month low. Storage levels are now 24% below last year at this time and 28% below the 5 year average. This is still a material shortfall and we won’t go into this winter anywhere near last year’s or the 5 year average levels (probably about 10% less than the 5 year average) but we have made a material dent in the storage deficit which was 50% below the 5 year average when we exited winter at the end of March. The weather will be anomalously cool for this time of year in the 6-10 day time frame. It’s the sequel to last winter’s Polar Vortex, The Return of the Mini-Polar Vortex. Normal temperatures in the Midwest for this time of year are in the 80-90 degree range. Next week temperatures are going to be in the 60-70 degree area which will kill A/C load. But remember folks, this is built into the market. This morning natty is up 0.5¢. Chatter.
After falling for more than a week oil bounced yesterday with WTI up 64¢ to $102.93 and Brent up 39¢ to $108.67. It most definitely looks like it’s a dead cat one for this morning WTI is getting taken out behind the woodshed and whipped like a naughty school boy being down $0.98. The fear premium in oil that resulted from events in in Ukraine and Iraq has and are dissipating. As I mentioned yesterday, those ISIS jihadist are no fools. They know they need income to fund their regime and they have only two things to sell: oil and sand and nobody wants the sand. Platt’s yesterday commented stating ISIS is earning more than $1 million per day selling crude from oil fields now under their control. ISIS tried to get as much as $11,000 per tanker truck, which can typically carry 200 barrels of oil, but the smugglers purchasing the oil refused to pay it. Instead they paid “only” $9,000 per tanker truck. It’s estimated at least 100 trucks are being loaded per day. This organization is well organized and well-funded. And dangerous. Remember, Al-Qaeda rejected them as being too extremist. Have a good weekend.
